Monday, February 22, 2016
Free Web Seminar: The Opportunities and Pitfalls of Cybersecurity and Data Privacy in Mergers and Acquisitions
One of my two former firms, King & Spalding, is hosting a free interactive web seminar on cybersecurity and M&A on February 25 at 12:30 p.m. Thought the web seminar might be of interest to some of our readers. The description is reproduced below.
An Interactive Web Seminar
The Opportunities and Pitfalls of Cybersecurity and Data Privacy in Mergers and Acquisitions
February 25, 2016
12:30 PM – 1:30 PM
Over the last several years, company after company has been rocked by cybersecurity incidents. Moreover, obligations relating to cybersecurity and data privacy are rapidly evolving, imposing on corporations a complex and challenging legal and regulatory environment. Cybersecurity and data privacy deficiencies, therefore, might pose potentially significant business, legal, and regulatory risks to an acquiring company. For this reason, cybersecurity and data privacy are becoming integral pre-transaction due diligence items.
This e-Learn will analyze the (1) special cybersecurity and data privacy dangers that come with corporate transactions; (2) strategies to mitigate those dangers; and (3) benefits of incorporating cybersecurity and data privacy into due diligence. The panel will zero in on these issues from the vantage point of practitioners in the deal trenches, and from the perspective of a former computer crime prosecutor and a former FBI agent who have dealt with a broad range of cyber risks to public and private corporations. This e-Learn is for managers and attorneys at all levels who are involved at any stage of the M&A process and at any stage of cyber literacy, from the beginner who is just starting to appreciate the complex nature of cyber risks to the expert who has addressed them for years. The discussion will leave you with a better understanding of this critical topic and concrete, practical suggestions to bring back to your M&A team.
Robert Leclerc, King & Spalding’s Corporate Practice Group and experienced deal counsel; Nick Oldham, King & Spalding, and Former Counsel for Cyber Investigations, DOJ's National Security Division; John Hauser, Ernst & Young, and former FBI Special Agent specializing in cyber investigations.
Tuesday, November 17, 2015
The defense for Don Blankenship, former CEO of Massey Coal, rested today without putting on any witnesses. Blankenship is on trial because he is charged with conspiring to violate federal safety standards. Investigators believe that Blankenship's methods contributed to a mine disaster that killed 29 people at the Upper Big Branch mine in West Virginia.
One part of the trial has an interesting business law component. Prosecutors have tried to show the Blankenship's interest in making more money was a key factor in cutting corners. One West Virginia news paper reported it this way:
“The government is using his compensation package as an indication of how much production mattered to Don,” said Mike Hissam, partner at Bailey & Glasser. “They’re using his compensation to establish a motive for him lying and making false statements to investors, their theory being his compensation was so tied up with company stock he had a motive for lying to the SEC and the public to protect his own personal net worth.”
It's possible that this is accurate, but I am leery of that line of thinking. It's not that I don't think it's possible Blankenship cut corners because it cost money, but it's not clear to me that would be the main of even a significant reason, if he did. The problem with this line of thinking is that Don Blankenship has tons and tons of money. So the risk is that the jury looks at and says, "Nope -- he's already rich. Why would that motivate him so much?" Further, while Blankenship stood to make money when things went well, his net worth was tied to company stock, so bad outcomes hurt him, too. The incentive story is not as easy as it seems.
My theory for the jury on this point would be more like this: Blankenship played the game to win. He liked winning, and he was used to winning, and he would not stop. His winning made him rich. And what was it that made him a winner? More coal coming out of the ground. His coal. Coal, not money, earned points. Coal, not protecting lives, earned points. Safety measures and slow downs or shut downs lost points. And Blankenship was about scoring points. If the rules didn't help him, he tried to change the rules. And who was hurt along the way did not matter. Because hurt people don't score points. Only coal matters in Blankenship's game.
Anyway, there's a reason I'm not a prosecutor, but I put my theory forth because I am a little skeptical that the money-as-the-goal message will resonate with a jury the way prosecutors hope. (To be clear, this is not the only theory prosecutors put forth -- it's just the one I am focusing on.) My colleague Pat McGinley explained the challenges with Blankenship this way:
"There are a considerable number of people who view Mr. Blankenship in his role as the Massey CEO as arrogant and dismissive of criticism," he said. "But the jury hasn't seen that side of him. And don't forget he's embraced by many people, including many powerful people; he's not universally viewed as arrogant or in a negative light. What's important here is what assessment is the jury going to have?
Had Blankenship testified, we'd have a better sense of what the jury might think of him, because we'd at least have his testimony to assess. We'd know at least part of what the jury knows. But he didn't. No witnesses for the defense, and no insight for those watching.
It should be an interesting few days.
Wednesday, October 28, 2015
I had the honor of being invited to speak at the annual symposium for the Wayne Law Review two weeks ago. The event, which focused on Corporate Counsel as Gatekeepers, was well organized and attended--and also very stimulating. Speakers included Tony West as a keynote, a few of us academics, and a bunch of current and former practitioners--prosecutors, in-house counsel, and outside counsel.
My presentation focused on a story that bugs me--a story built on an experience I had in practice. In the story (which modifies the true facts), an executive flagrantly violates a securities trading compliance plan that I drafted in connection with a subsequent transaction that I worked on for the executive's firm. Specifically, the executive informs a friend about the transaction the day before it is announced, believing that the friend will never trade on the information. The friend trades. The incident results in a stock exchange and Securities and Exchange Commission (SEC) inquiries. No enforcement is undertaken against the firm. However, the executive signs a consent decree with--and pays a cash penalty to--the SEC and, together with the firm, suffers public humiliation via a front-page article in the local newspaper (since the SEC would not agree to forego a press release). This fact pattern gnaws at me because I wonder whether there is anything more legal counsel can do to prevent an executive from violating a compliance policy to the detriment of himself and the firm . . . .
Thursday, October 22, 2015
BLPB guest-blogger Todd Haugh (Indiana University - Kelley School of Business) has a new article in the Vanderbilt Law Review entitled Overcriminalization's New Harm Paradigm. The abstract is reproduced below:
The harms of overcriminalization are usually thought of in a particular way—that the proliferation of criminal laws leads to increasing and inconsistent criminal enforcement and adjudication. For example, an offender commits an unethical or illegal act and, because of the overwhelming depth and breadth of the criminal law, becomes subject to too much prosecutorial discretion and faces disparate enforcement or punishment. But there is an additional, possibly more pernicious, harm of overcriminalization. Drawing from the fields of criminology and behavioral ethics, this Article makes the case that overcriminalization actually increases the commission of criminal behavior itself, particularly by white collar offenders. This occurs because overcriminalization, by lessening the legitimacy of the criminal law, fuels offender rationalizations. Rationalizations are part of the psychological process necessary for the commission of crime—they allow offenders to square their selfperception as “good people” with the illegal behavior they are contemplating, thereby allowing the behavior to go forward. Overcriminalization, then, is more than a post-act concern. It is inherently criminogenic because it facilitates some of the most prevalent and powerful rationalizations used by would-be offenders. Put simply, overcriminalization is fostering the very conduct it seeks to eliminate. This phenomenon is on display in the recently decided Supreme Court case Yates v. United States. Using Yates as a backdrop, this Article presents a new paradigm of overcriminalization and its harms.
Friday, October 9, 2015
Like many of you, I have been discussing the Volkswagen emission scandal in my business law classes.
Yesterday, Michael Horn, President and CEO of Volkswagen Group of America testified before the House Committee on Energy and Commerce Subcommittee on Oversight and Investigations. Horn's testimony is here.
West Virginia University, home of co-blogger Joshua Fershee, is featured on the first page of the testimony as flagging possible non-compliance issues in the spring of 2014.
The testimony includes multiple apologies, acceptance of full responsibility, and the statement that these "events are fundamentally contrary to Volkswagen’s core principles of providing value to our customers, innovation, and responsibility to our communities and the environment."
I plan to follow this story in my classes as the events continue to unfold.
Thursday, September 10, 2015
Are Crooked Executives Finally Going to Jail? DOJ’s New White Collar Criminal Guidelines and the Questions for Compliance Officers and In House Counsel
I think my life as a compliance officer would have been much easier had the DOJ issued its latest memo when I was still in house. As the New York Times reported yesterday, Attorney General Loretta Lynch has heard the criticism and knows that her agency may face increased scrutiny from the courts. Thus the DOJ has announced via the “Yates Memorandum” that it’s time for some executives to go to jail. Companies will no longer get favorable deferred or nonprosecution agreements unless they cooperate at the beginning of the investigation and provide information about culpable individuals.
This morning I provided a 7-minute interview to a reporter from my favorite morning show NPR’s Marketplace. My 11 seconds is here. Although it didn’t make it on air, I also discussed (and/or thought about) the fact that compliance officers spend a great deal of time training employees, developing policies, updating board members on their Caremark duties, scanning the front page of the Wall Street Journal to see what company had agreed to sign a deferred prosecution agreement, and generally hoping that they could find something horrific enough to deter their employees from going rogue so that they wouldn’t be on the front page of the Journal. Now that the Yates memo is out, compliance officers have a lot more ammunition.
On the other hand, the Yates memo raises a lot of questions. What does this mean in practice for compliance officers and in house counsel? How will this development change in-house investigations? Will corporate employees ask for their own counsel during investigations or plead the 5th since they now run a real risk of being criminally and civilly prosecuted by DOJ? Will companies have to pay for separate counsel for certain employees and must that payment be disclosed to DOJ? What impact will this memo have on attorney-client privilege? How will the relationship between compliance officers and their in-house clients change? Compliance officers are already entitled to whistleblower awards from the SEC provided they meet certain criteria. Will the Yates memo further complicate that relationship between the compliance officer and the company if the compliance personnel believe that the company is trying to shield a high profile executive during an investigation?
I for one think this is a good development, and I’m in good company. Some of the judges who have been most critical of deferred prosecution agreements have lauded today’s decision. But, actions speak louder than words, so a year from now, let’s see how many executives have gone on trial.
September 10, 2015 in Compliance, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Marcia Narine Weldon, Securities Regulation, White Collar Crime | Permalink | Comments (1)
Thursday, July 16, 2015
Love him or hate him, you can’t deny that President Obama has had an impact on this country. Tomorrow, I will be a panelist on the local public affairs show for the PBS affiliate to talk about the President’s accomplishments and/or failings. The producer asked the panelists to consider this article as a jumping off point. One of the panelists worked for the Obama campaign and another worked for Jeb Bush. Both are practicing lawyers. The other panelist is an educator and sustainability expert. And then there’s me.
I’ve been struggling all week with how to articulate my views because there’s a lot to discuss about this “lame duck” president. Full disclosure—I went to law school with Barack Obama. I was class of ’92 and he was class of ’91 but we weren’t close friends. I was too busy doing sit-ins outside of the dean’s house as a radical protester railing against the lack of women and minority faculty members. Barack Obama did his part for the movement to support departing Professor Derrick Bell by speaking (at minute 6:31) at one of the protests. I remember thinking then and during other times when Barack spoke publicly that he would run for higher office. At the time a black man being elected to the president of the Harvard Law Review actually made national news. I, like many students of all races, really respected that accomplishment particularly in light of the significant racial tensions on campus during our tenure.
During my stint in corporate America, I was responsible for our company’s political action committee. I still get more literature from Republican candidates than from any other due to my attendance at so many fundraisers. I met with members of Congress and the SEC on more than one occasion to discuss how a given piece of legislation could affect my company and our thousands of business customers. My background gives me what I hope will be a more balanced set of talking points than some of the other panelists. In addition to my thoughts about civil rights, gay marriage, gun control, immigration reform, Guantanamo, etc., I will be thinking of the following business-related points for tomorrow’s show:
1) Was the trade deal good or bad for American workers, businesses and/or those in the affected countries? A number of people have had concerns about human rights and IP issues that weren’t widely discussed in the popular press.
2) Dodd-Frank turns five next week. What did it accomplish? Did it go too far in some ways and not far enough in others? Lawmakers announced today that they are working on some fixes. Meanwhile, much of the bill hasn’t even been implemented yet. Will we face another financial crisis before the ink is dried on the final piece of implementing legislation? Should more people have gone to jail as a result of the last two financial crises?
3) Did the President waste his political capital by starting off with health care reform instead of focusing on jobs and infrastructure?
4) Did the President’s early rhetoric against the business community make it more difficult for him to get things done?
5) How will the changes in minimum wage for federal contractors and the proposed changes to the white collar exemptions under the FLSA affect job growth? Will relief in income inequality mean more consumers for the housing, auto and consumer goods markets? Or has too little been done?
6) Has the President done enough or too much as it relates to climate change? The business groups and environmentalists have very differing views on scope and constitutionality.
7) What will the lifting of sanctions on Cuba and Iran mean for business? Both countries were sworn mortal enemies and may now become trading partners unless Congress stands in the way.
8) Do we have the right people looking after the financial system? Is there too much regulatory capture? Has the President tried to change it or has he perpetuated the status quo?
9) What kind of Supreme Court nominee will he pick if he has the chance? The Roberts court has been helpful to him thus far. If he gets a pick it could affect business cases for a generation.
10) Although many complain that he has overused his executive order authority, is there more that he should do?
I don’t know if I will have answers to these questions by tomorrow but I certainly have a lot to think about before I go on air. If you have any thoughts before 8:30 am, please post below or feel free to email me privately at email@example.com.
July 16, 2015 in Constitutional Law, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Business, Marcia Narine Weldon, Securities Regulation, Television, White Collar Crime | Permalink | Comments (0)
Friday, May 29, 2015
If you have been following my guest posts regarding white collar crime and how white collar offenders rationalize their conduct, you likely have noticed that the discussion thus far has been largely theoretical. In this post, I’d like to offer some more concrete uses of rationalization theory and discuss how it may (should?) impact lawmakers and business people.
But before doing that, I have to explain, just for a moment, a bit more theory. One of the most fascinating things about rationalizations, in addition to how they operate, is where they come from. Researchers have concluded that rationalizations are not created in a vacuum; offenders do not invent them in the spur of the moment. Instead, offenders find their “vocabularies of motive” within their own environments. Donald Cressey suggested that rationalizations are “taken over” from “popular ideologies that sanction crime in our culture.” He pointed to commonplace sayings that suggest wrongdoing is acceptable in certain situations: “Honesty is the best policy, but business is business” and “All people steal when they get in a tight spot.” (Warren Buffett once called the phrase “Everybody else is doing it,” which is a clear rationalization, the five most dangerous words in business.) Once rationalizations such as these have been “assimilated and internalized by individuals,” they form powerful constructs that allow illegal behavior to go forward.
Building on this idea, two other criminologists, Gresham Sykes and David Matza, found that offender rationalizations originate from an even more specific location: the criminal law itself. According to Sykes and Matza, great “flexibility” exists in criminal law; even if a defendant commits a bad act, he may avoid punishment if he provides a legally valid justification or defense. Citing defenses to criminal liability such as necessity, insanity, and self-defense, Sykes and Matza viewed application of the criminal law as variable, a circumstance they found offenders incorporate into their psychological processes. Sykes and Matza determined that most unethical and illegal behavior was based on “what is essentially an unrecognized extension of [legal] defenses to crimes, in the form of justifications for deviance that are seen as valid by the delinquent but not by the legal system or society at large.” Put another way, would-be lawbreakers rationalize their behavior in order to fit it within a “defense” to the law that they deem valid, but that society or a court may not.
These finding have important implications for how we consider controlling unethical and criminal behavior in corporations. Our preferred model has been to pass legislation criminalizing conduct in reaction to corporate scandals, e.g., Sarbanes-Oxley after Enron and Dodd-Frank after the financial crisis. As scandals continue to occur, we look for new ways to make the detection and prosecution of crime easier for the government. Unfortunately, this approach has led to overcriminalization in many spheres, including white collar crime. There are now over 5,000 federal criminal statutes and as many as 300,000 federal regulatory provisions carrying criminal penalties. While certainly not all relate to white collar crime, many do. In fact, white collar crime underwent the biggest expansion of federal law during the 1970s and 1980s, and it likely took the lead again in the early 2000s. Along with that expansion came reduced mens rea requirements for many white collar crimes, as well as increased punishments, all of which has had the effect of shifting lawmaking and adjudicatory powers to prosecutors. What this means, as many have observed, is that white collar crime suffers from the same ills as other overcriminalized areas of the law—its “depth and breadth” has led to inconsistent enforcement and arbitrary adjudication. (A great example of this is the recent Supreme Court case Yates v. United States, which dealt with a commercial fisherman who was convicted under the anti-document shredding provision of Sarbanes-Oxley for throwing a crate of undersized fish overboard. Yates was subject to at least five partially overlapping obstruction statutes; the prosecutor charged him with the one carrying a 20-year maximum sentence. The Court overturned Yates’ conviction, based partly on concerns of overcriminalization.)
While the arbitrary enforcement of white collar criminal law is problematic for many reasons, the most profound harm it causes is that it makes the law more uncoordinated and illogical, thereby lessening the law’s overall legitimacy. Why is the lessening of the legitimacy of the law so harmful? The answer comes from the interaction between the perceived illegitimacy of white collar criminal law and rationalizations. As discussed above, rationalizations are drawn from the white collar offender’s environment, including the law governing his conduct. As would-be offenders increasingly believe those laws to be illegitimate, more space is created for them to rationalize their conduct. They see “defenses” to the law all around them, which they then internalize and incorporate into their own thought processes. Once this occurs, there is little stopping an offender’s future criminal conduct from going forward. Instead of deterring crime, then, adding more criminal statutes and regulations to an already overcriminalized area of the law fosters the very conduct sought to be eliminated. Put simply, more laws aimed at white collar crime may actually be creating more white collar criminal behavior. (For a more complete discussion of this topic, please see here.) Lawmakers considering the next round of white collar criminal statutes should be mindful of the role of rationalizations play, or they may be inadvertently creating the conduct they are trying to stop.
In my final post, I’ll discuss how these same ideas impact corporate compliance efforts.
Friday, May 22, 2015
Although my guest blogging has been focused on white collar rationalizations, I can't help but mention that, just about any way you cut it,* ninety days have passed since former Attorney General Holder asked U.S. Attorneys investigating the financial crisis to report back on whether they could make criminal cases against any individuals. I'm guessing that since we didn't hear any big announcements, there are no indictments sitting on current Attorney General Loretta Lynch's desk. Or maybe the currency trading guilty pleas were the announcement. Of course, those were charges against corporations, not individuals . . . and deals with the regulators have ensured the banks will continue to basically operate as usual . . . and hinky currency trading isn't what caused the financial crisis . . . and the banks involved weren't the biggest players in MBS in the run up to the collapse. You get the point. It looks like Wall Street executives may truly and forever be off the hook for what happened in 2008.
* If AG Holder was speaking generally, three months since his February 17 announcement was last Sunday. If he actually meant a hard ninety days, that elapsed last Monday. If he's a kind boss and has been giving his AUSA's weekends off for the past seven years, there's still hope!
Thursday, May 21, 2015
My last post outlined the criminological and behavioral ethics theories that help explain why corporate executives commit unethical and illegal acts. I’d like to unpack that a bit more by providing some specific rationalizations used by white collar offenders. This list includes the first five rationalizations to be identified by researches (sometimes called the “famous five”), and then supplements three others that are particularly relevant. Not surprisingly, there are disagreements as to exactly how many rationalizations there are and precisely how they operate. But, as one team of researchers put it, what is interesting about rationalization theory is what rationalizations do, “not the flavors they come in.”
Denial of Responsibility. Called the “master account,” the denial of responsibility rationalization occurs when the offender defines her conduct in a way that relieves her of responsibility, thereby mitigating “both social disproval and a personal sense of failure.” Generally, offenders deny responsibility by claiming their behavior is accidental or due to forces outside their control. White collar offenders deny responsibility by pleading ignorance, suggesting they were acting under orders, or contending larger economic conditions caused them to act illegally.
Denial of Injury. This rationalization focuses on the injury or harm caused by the illegal or unethical act. White collar offenders may rationalize their behavior by asserting that no one will really be harmed. If an act’s wrongfulness is partly a function of the harm it causes, an offender can excuse her behavior if no clear harm exists. The classic use of this technique in white collar crime is an embezzler describing her actions as “borrowing” the money—by the offender’s estimation, no one will be hurt because the money will be paid back. Offenders may also employ this rationalization when the victim is insured or the harm is to the public or market as a whole, such as in insider trading or antitrust cases.
Denial of the Victim. Even if a white collar offender accepts responsibility for her conduct and acknowledges that it is harmful, she may insist that the injury was not wrong by denying the victim in order to neutralize the “moral indignation of self and others.” Denying the victim takes two forms. One is when the offender argues that the victim’s actions were inappropriate and therefore he deserved the harm. The second is when the victim is “absent, unknown, or abstract,” which is often the case with property and economic crimes. In this instance, the offender may be able to minimize her internal culpability because there are no visible victims “stimulat[ing] the offender’s conscience.” White collar offenders may use this rationalization in frauds against the government, such as false claims or tax evasion cases, and other crimes in which the true victim is abstract.
Condemning the Condemners. White collar offenders may also rationalize their behavior by shifting attention away from their conduct on to the motives of other persons or groups, such as regulators, prosecutors, and government agencies. By doing so, the offender “has changed the subject of the conversation”; by attacking others, “the wrongfulness of [her] own behavior is more easily repressed.” This rationalization takes many forms in white collar cases: the offender calls her critics hypocrites, argues they are compelled by personal spite, or asserts they are motivated by political gain. The claim of selective enforcement or prosecution is particularly prominent in this rationalization. In addition, white collar offenders may point to a biased regulatory system or an anticapitalist government.
Appeal to Higher Loyalties. The appeal to higher loyalties rationalization occurs when an individual sacrifices the normative demands of society for that of a smaller group to which the offender belongs. The offender does not necessarily reject the norms she is violating; rather, she sees other norms that are aligned with her group as more compelling. In the white collar context, the group could be familial, professional, or organizational. Offenders rationalizing their behavior as necessary to provide for their families, protect a boss or employee, shore up a failing business, or maximize shareholder value are employing this technique. Notably, female white collar offenders have been found to appeal to higher family loyalties more than their male counterparts.
Metaphor of the Ledger. White collar offenders may accept responsibility for their conduct and acknowledge the harm it caused, yet still rationalize their behavior by comparing it to all previous good behaviors. By creating a “behavior balance sheet,” the offender sees her current negative actions as heavily outweighed by a lifetime of good deeds, both personal and professional, which minimizes moral guilt. It seems likely that white collar offenders employ this technique, or at least have it available to them, as evidenced by current sentencing practices—almost every white collar sentencing is preceded by a flood of letters to the court supportive of the defendant and attesting to her good deeds.
Claim of Entitlement. Under the claim of entitlement rationalization, offenders justify their conduct on the grounds they deserve the fruits of their illegal behavior. This rationalization is particularly common in employee theft and embezzlement cases, but is also seen in public corruption cases.
Claim of Relative Acceptability/Normality. The final white collar rationalization entails an offender justifying her conduct by comparing it to the conduct of others. If “others are worse” or “everybody else is doing it,” the offender, although acknowledging her conduct, is able to minimize the attached moral stigma and view her behavior as aligned with acceptable norms. In white collar cases, this rationalization is often used by tax violators and in real estate and accounting frauds.
I’ve identified the use of these rationalizations by white collar offenders such as Rajat Gupta, Peter Madoff, Allen Stanford, and others. But I’d be interested to hear from readers where they’ve seen “vocabularies of motive” in the white collar world. (If you’re not sure, try starting with Bloomberg's oral history of Drexel Burnham Lambert, in what has to be the largest collection of rationalizations ever assembled.)
Thursday, May 14, 2015
My post from last week posed the question of why corporate executives do what they do. Why do they commit unethical and illegal acts? If you ask almost anyone this, the answer comes back the same: corporate executives are greedy. That’s why they lie, cheat, and steal. Follow that up with the question of what should be done about it, and most people say that more law and more prison time is the solution.
I’ve never bought into that thinking (as to the cause or the fix). Sure, some of us are greedy. And some small percentage of us are looking to break the law to advance our own interests at every opportunity. But I’ve seen too many good people do bad things, and vice versa, to think that the cause of illegal corporate behavior (or almost any behavior) is somehow an inherently binary condition—good or bad, right or wrong, greedy or selfless. The reality is that many of us are both good and bad at the same time. But how does that actually work? How can someone like Rajat Gupta, the former managing director of Goldman Sachs, spend his time chairing three international humanitarian organizations and positively impacting “humanity writ large” (can you say that?), while also passing boardroom secrets to his billionaire hedge fund pal, Raj Rajaratnam?
Criminological and behavioral ethics theories help explain this duality. In the 1960’s, a criminologist named Donald Cressey conducted a study of hundreds of convicted embezzlers. Cressey determined that three key elements are necessary for violations of trust—the essence of almost all white-collar crime—to occur: (1) an individual possesses a “nonshareable problem,” i.e., a problem the individual feels cannot be solved by revealing it to others; (2) the individual believes the problem can be solved in secret by violating a trust, which is usually tied to their employment; and (3) the individual “verbalizes” the relationship between the nonshareable problem and the illegal solution in “language that lets him look on trust violation as something other than trust violation.” Put another way, the individual uses words and phrases during an internal dialogue that makes the behavior acceptable in his mind, such as by telling himself he is “borrowing” the embezzled money and will pay it back. Cressey believed that these verbalizations—what we commonly call rationalizations—were “the crux of the problem” of white collar crime, because they allowed an offender to keep his perception of himself as an honest citizen intact while acting in a criminal manner. This, in essence, is the psychological mechanism that allows good people to do bad things.
Importantly, Cressey (and others after him) found that rationalizations were not simply after-the-fact excuses offenders used to lessen their culpability upon being caught. Instead, rationalizations were “vocabularies of motive,” words and phrases that existed as group definitions labeling deviant behavior as appropriate, rather than excuses invented by the offender “on the spur of the moment.” In other words, offender rationalizations are drawn from larger society and put into use prior to the commission of criminal acts. This insight—that offenders rationalize their unethical or criminal conduct before they act, which then allows their conduct to proceed—is considered a key insight into white collar criminal behavior and has greatly influenced criminologists and behavioral ethicists alike.
In the next post, I will set out some of the most common rationalizations used by white collar offenders. And we’ll see that these rationalizations are present in many, if not most, of today’s headline-grabbing cases of corporate wrongdoing.
Thursday, May 7, 2015
As I begin my guest spot here at Business Law Profs Blog, I’ve really enjoyed reading the recent posts by Ann Lipton (here) and Marcia Narine (here) on corporate whistleblowers. What has always fascinated me about whistleblowers is the “why” question: why do they do it knowing all the negatives—to their career, their family, their psyche—in store for them?
While I don’t have any great insights as to the answer (although others do), trying to figure out why corporate executives do what they do—particularly in the realm of business ethics and white collar crime—is something I’ve been focused on for a while, first as a white collar criminal defense attorney and now as an academic. One way I’ve tried to look at the issue is by pulling together disciplines that provide some understanding of why business people commit bad acts and what our collective response to that should be. This has led me primarily into the areas of criminology, behavioral ethics, and federal sentencing. And what emerges from that soup, at least for me, is the concept of rationalization—that very powerful, and very human, way of viewing oneself positively (say, as an upstanding citizen, family man, etc.), while taking actions inconsistent with that view according to society’s standards (say, by passing a stock tip to a friend, misrepresenting your company’s financials, etc.). I see rationalization as the critical step in the commission of white collar crime, and thus what should be the focus of our corporate compliance and white collar crime enforcement efforts.
Over the next few posts, I’ll try and flesh out these ideas, explaining how rationalizations operate, their most common iterations in the white collar world, and how our current regulatory and corporate compliance efforts, by failing to consider the role of rationalizations, might actually be leading to more corporate wrongdoing.